Editorial: Innovation - The Next Big Test for China’s Economy

The humbling moment in late May when Google's artificial intelligence program defeated the world champion in the ancient Chinese board game Go has fueled expectations that technological breakthroughs will lead to revolutionary changes in the world.

The 3-nil victory of AlphaGo over Ke Jie in the 2,500-year-old contest of strategy and intellect that is exponentially more complex than the game of chess, showcased the power of deep learning and reinforcement learning, technologies that allow machines to learn largely on their own. They can also revolutionize everything from health care to space exploration, the creators of AlphaGo said.

The so-called “fourth industrial revolution” unfolding globally is underpinned by fast-growing, category-bending technologies including data mining, cloud computing, the Internet of Things (IoT), self-driving cars and blockchain technology used for digital currency transactions. They are reshaping traditional industries and business models and can inject fresh momentum into China’s slowing economy if harnessed correctly.

But, top-down attempts to build an innovation-driven economy may create misguided incentives and tech bubbles. It could also intensify technology-driven disparities and challenge the established regulatory system. It remains a common narrative in Western media that creativity in China is stifled by state intervention, but the truth is China is rapidly closing the technological gap with the West across many sectors. The rate may vary, but the overall trend is unmistakable. China should push ahead with efforts to modernize outdated production facilities through smart manufacturing, while fostering emerging sectors such as biotechnology. To achieve these goals, policymakers should focus on building lean institutions that are business-friendly and can keep pace with technological changes.

Starting from the 1980’s, U.S. and other developed countries focused on vigorously developing services such as finance, film and entertainment. But after the 2008 financial crisis, many of them rushed to revive domestic industries and upgrade their manufacturing capacity. Meanwhile, money poured into research and development in the Information Communication Technology (ICT) sector over the past two decades is yielding fruit with many findings ready for commercial use.

China’s old growth model that relied on government investment and low-cost labor is losing steam as production costs surge and industrial overcapacity worsens. But, it has created an opportunity for the country to shift to a technology-driven economy. China’s massive domestic market and abundant talent has offered a solid foundation for the development of internet-related businesses. Many expect that over the next few years, China will be home to technology bellwethers that can rival foreign giants such as Google, Microsoft and Apple that can also help the country’s manufacturing sector to evolve.

This requires visionary political and business leaders to take action now, and strengthen China’s capacity for fundamental research, innovation and technology adaptation. Over the past three decades, China has been reckless, imitating and producing counterfeits for instant profits and taking over low-end manufacturing from developed countries. But in the era of technology-driven growth, China must stop copying others and develop original ideas and strengthen its basic research capacity, so that the country will not languish at the bottom of the industrial value chain.

Private venture capitalists, government-backed incubators and angel investors have all dived in headlong into the current wave of innovation sweeping across major Chinese cities with startups competing tooth and nail to commercialize new technologies. In an interesting trend, several internet companies are branching out into manufacturing, such as developing self-driving cars. However, a shift to high-end production requires long-term efforts and a country needs original ideas and home-grown products to build a real competitive edge.

Innovation is also a double-edged sword that can worsen existing inequalities. Fruits of technology-driven growth have always been unevenly distributed across the globe and disruptive changes can alienate huge swaths of the population.

The use of robots or drones, for example, will reduce the cost of labor, logistics and other factors of production, and shakeup global manufacturing. Countries that have relied on low-cost labor and cheap resources instead of innovation will soon be marginalized as the rules of international trade are rewritten. China must be aware of and prepared for these challenges.

A sound socioeconomic environment is vital to foster innovation. Short-sighted moves that bring instant benefits or relying on the state muscle to push forward technology breakthroughs will not deliver results in the long run. Hyperactive local governments eager to win state funds will create even more overcapacity and may tend to focus on quantity rather than quality. Policymakers should instead, trust the market’s ability and judgment and play its role as a supervisor and service provider.

According to leading economist Wu Jinglian, institutions were crucial to managing technology and economic reform. For a long time, the lack of protections and incentives has hurt innovation in China. It is important to create such arrangements to promote fair competition and protect intellectual property rights. This requires promoting the rule of law and encouraging creative thinking.

The rapid pace of technological change is creating unprecedented challenges for China and how the country deals with these will be the next big test facing its economy. The country should remain humble as it grapples with future uncertainties. It’s clear that institutional innovation is essential if the country wants to leapfrog ahead of its competition. This requires political will to break-up groups with vested interests and promote institutional transformation.